You should want your VAT bills to be really, really big

For some reason, the league table of taxes that businesses and their owners resent paying, from most to least, appears to be:

1. VAT
2. Corporation Tax
3. PAYE

In actual fact, anyone who thinks about it rationally will quickly come to the conclusion that, rather than wanting to minimise them, they should want them all to get bigger and bigger every year. And, despite appearing to be the most resented tax of all, VAT is the purest example of why that is.

The VAT you pay over to HMRC is never your money to begin with - it’s only ever resting in your account, Father Ted style. Every time a customer pays you, £5 of their money is for you, and £1 is VAT. You’re just looking after the VAT, and every three months you add up all the VAT that customers have given you, and hand it over to HMRC. It should be clear that:

1. Ideally you’ll have collected masses of VAT, because if there was £1 for HMRC there was £5 for you! You want countless fivers coming in if possible.
2. Over the quarter, you’ve had the benefit of using the VAT money in your own business as working capital. You’ll hand over the VAT you collected in January, February and March in early May and won’t have the use of it any more, but even then you’re still left sitting on the VAT you collected in April. We recently met someone who told us that their big VAT bills were terrible for cashflow. It’s the total opposite. You’ve a rolling interest-free loan, and the bigger your VAT bills, the more it is!

Of course, you don’t hand over every penny of VAT you’ve collected to HMRC. The bill is reduced by the VAT you’ve paid out to others over the quarter. But, in that case, for every £1 of VAT you’ve paid out, you’ve paid out £5 to a supplier. This time, if you’re trying to maximise profit, you want to hand out as few fivers as possible! If you’ve little VAT to offset against the bill, you must have spent little on overheads, hopefully indicative of a profitable quarter.

PAYE is two-thirds Father Ted, too. Three things are being handed over to HMRC - Employer’s National Insurance, Employees’ National Insurance, and Income Tax (and potentially, other bits and pieces like Student Loan repayments). Only the first of those is a cost to you. The rest has all been withheld from your employees’ salaries to be passed on to HMRC on their behalf. The payment terms for PAYE aren’t as generous as those for VAT, but you still get to use other people’s money in your own business for a while, and if you’re struggling to find your employees’ money to hand it over to HMRC just three weeks later, that’s a sign of a problem somewhere, not a sign that PAYE payments are somehow bad or unfair.

Corporation tax? £1 for them, £3 or £4 for you. Again, you want as much of the latter as possible, and the former is just the other side of the coin.

Businesses with big profits have big tax bills, and growing businesses have growing tax bills. Welcome them!

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